- After Puducherry, Congress-ruled Rajasthan last week became the latest Opposition-ruled state to opt for a special borrowing window for meeting its compensation shortfall under Goods and Services Tax (GST). Other dissenting states — Kerala, Punjab, West Bengal, Chhattisgarh, Jharkhand — are yet to join any of the borrowing options floated by the central government to resolve the issue of compensation deficit in the current financial year.
- The central government has tried to be as accommodative as possible because states and Centre have to work together. Borrowing has been made very simple. States are not being burdened, interest rate is low.
What is the special window for borrowing?
- The Finance Ministry had said last month that the Centre would borrow from the market and then act as an intermediary to arrange back-to-back loans to pay the GST compensation shortfall of Rs 1.1 lakh crore to state governments. This arrangement will not reflect in the fiscal deficit of the Centre, and will appear as capital receipts for state governments.
- Kerala, Punjab and Chhattisgarh have insisted on further clarification and a no-strings-attached borrowing mechanism, and inclusion of the balance compensation deficit amount beyond the proposed borrowing of Rs 1.10 lakh crore, too, under the ambit of the back-to-back loan mechanism.
- The total GST revenue shortfall for the current fiscal was estimated at Rs 3 lakh crore, of which compensation cess collection was estimated at Rs 65,000 crore, leaving a compensation deficit of Rs 2.35 lakh crore. Of this Rs 2.35 lakh crore, Rs 1.1 lakh crore has been estimated as shortfall on account of GST implementation, while the rest is being estimated as the impact of the pandemic.
- In August, the Centre gave two options to the states — either borrow Rs 97,000 crore from a special window facilitated by the RBI, or borrow Rs 2.35 lakh crore from the market. The options have since been revised to Rs 1.10 lakh crore and Rs 1.8 lakh crore, respectively.
Why could states not borrow instead of the Centre enabling the borrowing?
- The earlier proposal was for a special window to be facilitated by the RBI and the Centre, but states would have had to tap the window separately. One of the primary concerns for that mechanism was that states, even if divided into groups, would have tapped the market for borrowing separately, leading to differential rates with a wide variance in interest rates between the states with more debt and those with less debt.
- Also, the yields for state development loans (SDLs), which is the tool for market borrowing by states, are generally at a premium, higher than the yield on the central government’s government securities. So, it would have been costlier for states to borrow rather than the Centre borrowing at a uniform rate and then passing it on to them as a back-to-back loan.
How has the scheme progressed so far?
- Under the special window, the Centre has already borrowed Rs 12,000 crore in two equal instalments and passed it on to 21 states and three Union Territories on October 23 and November 2. The second round of borrowing was done at an interest of 4.42%, and the first round at 5.19%, lower than the cost of borrowing for states.
- Out of the Rs 12,000 crore, Karnataka, Maharashtra and Gujarat have received Rs 1,872 crore, Rs 1,808 crore and Rs 1,391 crore, respectively.
- The first tranche of the borrowing was carried out on October 23, where the Centre borrowed and transferred Rs 6,000 crore to 16 states and two UTs, including Maharashtra, Gujarat, Karnataka, Himachal Pradesh, Bihar, Goa, Assam, Uttar Pradesh, Delhi and Jammu & Kashmir.
- With Rajasthan joining in, 22 states and three UTs have opted for the borrowing under the special window proposed by the Centre to meet the Rs 1.83 lakh crore shortfall in GST revenue. The ministry intends to release Rs 6,000 crore to the states every week.
What is the way forward for the rest?
- The Finance Ministry is now engaged in dialogue with the opposing states to join the scheme. Economists say the borrowing issue has only been resolved for the compensation shortfall for this fiscal and it remains to be seen how this issue will be resolved for the next fiscal, given that tax revenues are expected to grow at a lower rate than the 14% growth guaranteed to states under the compensation mechanism of GST.
- Bigger question is what is going to happen in FY2022. Whether the Finance Commission will come out with some roadmap such that cess collection is not sufficient for 14% compensation. Rather than waiting for the last moment and doing back and forth, the GST Council should have thrashed out a resolution.